Home Depot 2008 Annual Report Download - page 38

interest charges incurred by the Company for its deferred financing programs offered to its customers are included in Cost
of Sales. The interchange fees charged to the Company for the customers’ use of the cards and the profit sharing with the
third-party administrator are included in Selling, General and Administrative expenses (“SG&A”). The sum of the three is
referred to by the Company as “the cost of credit” of the private label credit card program.
In addition, certain subsidiaries of the Company extend credit directly to customers in the ordinary course of business.
The receivables due from customers were $37 million and $57 million as of February 1, 2009 and February 3, 2008,
respectively. The Company’s valuation reserve related to accounts receivable was not material to the Consolidated
Financial Statements of the Company as of the end of fiscal 2008 or 2007.
Merchandise Inventories
The majority of the Company’s Merchandise Inventories are stated at the lower of cost (first-in, first-out) or market, as
determined by the retail inventory method. As the inventory retail value is adjusted regularly to reflect market conditions,
the inventory valued using the retail method approximates the lower of cost or market. Certain subsidiaries, including
retail operations in Canada, Mexico and China, and distribution centers record Merchandise Inventories at the lower of
cost or market, as determined by a cost method. These Merchandise Inventories represent approximately 18% of the total
Merchandise Inventories balance. The Company evaluates the inventory valued using a cost method at the end of each
quarter to ensure that it is carried at the lower of cost or market. The valuation allowance for Merchandise Inventories
valued under a cost method was not material to the Consolidated Financial Statements of the Company as of the end of
fiscal 2008 or 2007.
Independent physical inventory counts or cycle counts are taken on a regular basis in each store and distribution center to
ensure that amounts reflected in the accompanying Consolidated Financial Statements for Merchandise Inventories are
properly stated. During the period between physical inventory counts in stores, the Company accrues for estimated losses
related to shrink on a store-by-store basis based on historical shrink results and current trends in the business. Shrink (or
in the case of excess inventory, “swell”) is the difference between the recorded amount of inventory and the physical
inventory. Shrink may occur due to theft, loss, inaccurate records for the receipt of inventory or deterioration of goods,
among other things.
Income Taxes
The Company provides for federal, state and foreign income taxes currently payable, as well as for those deferred due to
timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Federal,
state and foreign tax benefits are recorded as a reduction of income taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the
period that includes the enactment date.
The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return. Non-U.S. subsidiaries and
certain U.S. subsidiaries, which are consolidated for financial reporting purposes, are not eligible to be included in the
Company’s consolidated U.S. federal income tax return. Separate provisions for income taxes have been determined for
these entities. The Company intends to reinvest substantially all of the unremitted earnings of its non-U.S. subsidiaries and
postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes for these non-U.S. subsidiaries was
recorded in the accompanying Consolidated Statements of Earnings.
Depreciation and Amortization
The Company’s Buildings, Furniture, Fixtures and Equipment are recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets. Leasehold Improvements are amortized using the straight-line method
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